Bond fund investing- need advice

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Bond fund investing- need advice

Postby martlou » Mon Jan 07, 2013 11:31 am

I was advised by an investment planner that to allocate 50% of my portfolio into bonds, I should move a substantial amount from the money market into VBTLX.

I bought this at a NAV of $11.20 and didn't dollar cost average, so I am down. Forgive my lack of knowledge here. I just haven't had much money in bonds over the years and have concern that the price dropped in the last few days but interest rates didn't go up.

I am trying to decide if I should sell some of this and put it back into the money market.
I have 6 years to go before I will start accessing the money.
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Re: Bond fund investing- need advice

Postby hollowcave2 » Mon Jan 07, 2013 12:53 pm

First of all, you're watching the fund over a few days, which is too short a time frame to make meaning out of these fluctuations. A bond fund will fluctuate and that is different from a money market fund. The time frame to look at is a few years, not a few days. Your angst may mean that you've exceeded your risk tolerance, but I would not move money back into a money market unless you need the money now. You haven't even received your first dividend yet!

An alternative could be to reduce your exposure to volatility by putting half of the money into a short term fund. That would be the short term index, or I personally like the short term investment grade fund. Your advisor was probably trying to maximize the amount of interest paid for a given volatility, and the total bond fund is a good choice for that.

I would only have money in a money market if you need immediate liquidity. Another choice might be certificates of deposit (CD's) that are FDIC insured, but you would need to ladder them in order to have some liquidity if you need money.

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Re: Bond fund investing- need advice

Postby martlou » Mon Jan 07, 2013 1:02 pm

Thank you for your post! I think my discomfort comes from having so much money in one fund plus my lack of experience with bond funds fluctuating over time. I don't need to move it for liquidity so I will hang in there. It looks like I bought the fund at the high though!
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Re: Bond fund investing- need advice

Postby NYBoglehead » Mon Jan 07, 2013 1:45 pm

martlou wrote:Thank you for your post! I think my discomfort comes from having so much money in one fund plus my lack of experience with bond funds fluctuating over time. I don't need to move it for liquidity so I will hang in there. It looks like I bought the fund at the high though!


Don't look at it too frequently. It'll go up and down over time, but in the end you should be good. Even if interest rates rise the NAV will go down but you'll be receiving more interest and re-investing it at a lower NAV, thus buying more shares. It is much better there than in the money market fund. I know having that much in one fund sounds like a lot, but the fund invests in thousands of bonds and will be adding new ones as they are issued. 6 years is still a lot of time, don't worry about the day to day flucuations.
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Re: Bond fund investing- need advice

Postby martlou » Mon Jan 07, 2013 2:20 pm

Thank you! I appreciate your input!
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Re: Bond fund investing- need advice

Postby reggiesimpson » Mon Jan 07, 2013 2:36 pm

NYBoglehead wrote:
martlou wrote:Thank you for your post! I think my discomfort comes from having so much money in one fund plus my lack of experience with bond funds fluctuating over time. I don't need to move it for liquidity so I will hang in there. It looks like I bought the fund at the high though!


Don't look at it too frequently. It'll go up and down over time, but in the end you should be good. Even if interest rates rise the NAV will go down but you'll be receiving more interest and re-investing it at a lower NAV, thus buying more shares. It is much better there than in the money market fund. I know having that much in one fund sounds like a lot, but the fund invests in thousands of bonds and will be adding new ones as they are issued. 6 years is still a lot of time, don't worry about the day to day flucuations.

+1
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Re: Bond fund investing- need advice

Postby Bustoff » Mon Jan 07, 2013 10:42 pm

TBM has an average duration of 5.2 years.

duration
A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point.

In 1994, when the U.S. Federal Reserve raised its target interest rate six times, bond funds on average lost 4.6 percent, according to Morningstar.

Today’s bond fund investors may be hit with declines steeper than those at other points in history when interest rates rose, says Ken Volpert, head of taxable bonds for Vanguard Group. In previous periods, yields were higher, about 6 percent or 7 percent, he says. That meant investors received bigger interest payments to offset price declines. Yields in bond funds are so low today that rates don’t have to increase much before investors would see negative returns. A 10-year Treasury is yielding about 1.7 percent. If yields rise to 2.7 percent, investors would have losses of about 7.5 percent even with interest payments, Volpert says. The Fed has supported the bond market by keeping its target rate for overnight loans among banks between zero and 0.25 percent since December 2008. While the Fed said on Sept. 13 it will probably keep the federal funds target rate near zero until mid-2015, long-term rates could rise before then.
http://www.businessweek.com/articles/20 ... ors-beware
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Re: Bond fund investing- need advice

Postby martlou » Tue Jan 08, 2013 9:38 am

Thank you for clarifying! So if I understand correctly, on a 5.2 duration, the price would fall 5% approximately with 1% yield increase, and it could take about 1.5 years to be even again if the yield increased from 1.7 to 2.7% ? With this explanation, how is the bond fund going to be better than leaving the money in a money market?
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Re: Bond fund investing- need advice

Postby livesoft » Tue Jan 08, 2013 9:51 am

martlou wrote:I bought this at a NAV of $11.20 and didn't dollar cost average, so I am down.

So it appears that VBTLX is down 0.5% in value since the NAV was last at 11.20. Bond funds fluctuate much more than that. In another 2 weeks, it may be up 0.5% in value or down another 0.5% in value. And VBTLX has the same value it had 3 months ago: It's return has been 0% since early October.

If one cannot sleep well with a bond fund that fluctuates by 0.5% in a day or week, then one should probably consider going back to CDs.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Bond fund investing- need advice

Postby martlou » Tue Jan 08, 2013 10:01 am

I am ok with the fluctuation as long as the fund eventually has better results than the money market. I don't need the money for another 6 years. Thanks for the post!
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Re: Bond fund investing- need advice

Postby livesoft » Tue Jan 08, 2013 10:04 am

Well, one cannot predict the future, so it would be better to write:

I'm OK with a good chance the fund eventually has better results than the money market, but I'm also OK if it doesn't have better results than the money market.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Bond fund investing- need advice

Postby Bustoff » Tue Jan 08, 2013 10:24 am

martlou wrote: how is the bond fund going to be better than leaving the money in a money market?


While the NAV of the TBM is essentially flat after one year, each share paid 12 months of dividends totaling $0.36 cents.
The Prime money market paid 12 months of dividends totaling $0.00036. I don't even know how to say that figure.

There are a lot of savvy investors around here. Rather than asking if TBM is a good investment going forward, perhaps we can ask Bogleheads which bond funds they are investing in going forward.

Vanguards Ken Volpert claims, “The best place to be is very defensive and very short-term,” he pointed to Vanguard Short-Term Corporate Bond ETF (VCSH) or Vanguard Short-Term Investment-Grade Fund (VFSTX) .

Perhaps adjusting your fixed income allocation to three equal parts such as 1/3 Short-Term Corporate Bond, 1/3 Total Bond Fund, 1/3 CD's might help you sleep better.
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Re: Bond fund investing- need advice

Postby livesoft » Tue Jan 08, 2013 10:39 am

Thirty-six millicents.

But "$0.36 cents"? What's the dollar sign doing in there?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Bond fund investing- need advice

Postby sscritic » Tue Jan 08, 2013 11:02 am

livesoft wrote:Thirty-six millicents.

But "$0.36 cents"? What's the dollar sign doing in there?

0.36 mills.

Confusing us. Or is it the word cents that is confusing us?
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Re: Bond fund investing- need advice

Postby Bustoff » Tue Jan 08, 2013 11:44 am

sscritic wrote:
livesoft wrote:Thirty-six millicents.

But "$0.36 cents"? What's the dollar sign doing in there?

0.36 mills.

Confusing us. Or is it the word cents that is confusing us?


livesoft and sscritic - what is your opinion as to Volperts advice ?
“There are two times in a man's life when he should not speculate: when he can't afford it, and when he can.”
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Re: Bond fund investing- need advice

Postby martlou » Tue Jan 08, 2013 11:47 am

Bustoff wrote:
martlou wrote: how is the bond fund going to be better than leaving the money in a money market?


While the NAV of the TBM is essentially flat after one year, each share paid 12 months of dividends totaling $0.36 cents.
The Prime money market paid 12 months of dividends totaling $0.00036. I don't even know how to say that figure.

There are a lot of savvy investors around here. Rather than asking if TBM is a good investment going forward, perhaps we can ask Bogleheads which bond funds they are investing in going forward.

Vanguards Ken Volpert claims, “The best place to be is very defensive and very short-term,” he pointed to Vanguard Short-Term Corporate Bond ETF (VCSH) or Vanguard Short-Term Investment-Grade Fund (VFSTX) .

Perhaps adjusting your fixed income allocation to three equal parts such as 1/3 Short-Term Corporate Bond, 1/3 Total Bond Fund, 1/3 CD's might help you sleep better.


Thank you again, maybe some other savvy investors will respond, and I will look into your allocation suggestions.
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Re: Bond fund investing- need advice

Postby sscritic » Tue Jan 08, 2013 11:52 am

I don't buy bond funds to make money (although I did sell some this year and was forced to take a profit), but to have something that won't drop by 50%. I could use CDs for that and I have some (a small amount), but I am not changing anything. I have the equivalent of total bond, inflation-protected, and a muni fund and am sitting tight. I am more concerned with what will happen on the equity side, but there is nothing I can do about that (my crystal ball is not helping at all; can I get a refund?), so I am sitting tight there as well.

I am retired and not putting a lot into either stocks or bonds, so sitting tight is about all I can do. And watch Chinese soap operas.

P.S. I am not an investing guru, not by a long shot. I don't tell other people what AA they should have. Now if you want someone to read a federal regulation for you, give me a call.
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Re: Bond fund investing- need advice

Postby martlou » Thu Jan 31, 2013 2:19 pm

Apparently, I bought this fund at a bad time at as advised. $11.20 nav price.
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Re: Bond fund investing- need advice

Postby martlou » Thu Jan 31, 2013 2:26 pm

Apparently, I bought this fund (VBTLX) at a bad time. I was advised to put all the bond money into this one fund at $11.20 nav price.
I realize it has only been a month but I don't see how the dividends are going to compensate for the loss with the interest rates so low. I am not a savvy bond investor and the fluctuation isn't comfortable to me. I have primarily been in stocks and cash. I am advised to hang in there but at this point I am not seeing how I am going to break even because my nav (on $175,000) was $11.20. I am 6 years from drawing the money so maybe that will sort it out.
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Re: Bond fund investing- need advice

Postby Call_Me_Op » Thu Jan 31, 2013 2:48 pm

This is no means a catastrophe - so don't panic. One lesson to learn from it is to fully understand something before you invest in it - regardless of what investment that is. There is nothing wrong with sitting in cash for a long time while you understand your options. I am not saying the intermediate bond funds are a bad investment, just that things tend to go a whole lot smoother when you understand how they work, and competing investments, before taking the plunge. Also, dollar-cost averaging is a good idea if you have concerns about investing a large sum all at once.
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Re: Bond fund investing- need advice

Postby JW Nearly Retired » Thu Jan 31, 2013 3:29 pm

martlou wrote: Thank you for clarifying! So if I understand correctly, on a 5.2 duration, the price would fall 5% approximately with 1% yield increase, and it could take about 1.5 years to be even again if the yield increased from 1.7 to 2.7% ? With this explanation, how is the bond fund going to be better than leaving the money in a money market?

Good question. Burton Malkiel said a year ago that bonds are "sure losers", or words to that effect. Nothing is sure and people have been saying such things for a while now and nothing much has happened. Still, if and when the economy picks up, interest rates will rise. If they rise very quickly and/or high you would have been better off leaving it in a money market.

I really know nothing much about bonds, but I feel better having a mix of money market/bonds/tips as my fixed income allocation.
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Re: Bond fund investing- need advice

Postby martlou » Thu Jan 31, 2013 5:10 pm

This is no means a catastrophe - so don't panic. One lesson to learn from it is to fully understand something before you invest in it - regardless of what investment that is. There is nothing wrong with sitting in cash for a long time while you understand your options. I am not saying the intermediate bond funds are a bad investment, just that things tend to go a whole lot smoother when you understand how they work, and competing investments, before taking the plunge. Also, dollar-cost averaging is a good idea if you have concerns about investing a large sum all at once.


Thanks, unfortunately, I had been sitting on cash and at the advise of an advisor put that money (all of it) in the one bond fund. The idea was that the NAV wasn't as important as the allocation ratio for bonds and stocks. In my investing, I have never put that much into one fund at one time. I have done my own research but in this case I relied on expertise, and I didn't understand that the bond prices would drop even if interest rates didn't rise. At least, that seems to be what has happened in the last month or so. If I had left it in the money market, inflation might erode it but I wouldn't be down $3000.
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Re: Bond fund investing- need advice

Postby livesoft » Thu Jan 31, 2013 5:25 pm

I am surprised you are fixated on the $11.20 price you paid. Since you purchased this fund it has paid out $0.07824 in distributions and will pay today another ~$0.022 dividend, for about a $0.10 total. That really means you bought for $11.10. It will probably have a NAV today of $11.00 even, so you will be down less than $1800 since you purchased. (I don't see how you say you have lost $3,000.) To me that seems quite a small fluctuation for an intermediate-term bond fund and no big deal.

So as I wrote before, if this really bothers you, first get the math right, then use CDs instead of bond funds.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Bond fund investing- need advice

Postby martlou » Thu Jan 31, 2013 6:45 pm

I am surprised you are fixated on the $11.20 price you paid. Since you purchased this fund it has paid out $0.07824 in distributions and will pay today another ~$0.022 dividend, for about a $0.10 total. That really means you bought for $11.10. It will probably have a NAV today of $11.00 even, so you will be down less than $1800 since you purchased. (I don't see how you say you have lost $3,000.) To me that seems quite a small fluctuation for an intermediate-term bond fund and no big deal.


You are right, with the distribution today, it should be around $1800. It isn't a large fluctation, true. I am just trying to get insight and appreciate the input.
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Re: Bond fund investing- need advice

Postby martlou » Tue Jun 25, 2013 11:39 pm

Can anyone explain to me why the nav is dropping when the interest rates aren't rising to date. All of my bond money, half of my portfolio is in this fund. I was ok with it, but I am now "fixated" again on the dropping nav and wondering how much it could potentially drop. Not a savvy bond investor here.
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Re: Bond fund investing- need advice

Postby ogd » Wed Jun 26, 2013 12:02 am

Hi martlou,

Sorry you are seeing these fluctuations, but such is life.

What happened is that the market is anticipating the end of the Fed's easy money policy. Among other things, this will lead to higher Fed fund rates in the future. The market does not wait until that happens, but tries to anticipate it. So investors demand higher yields in order to hold bunds that they expect will be relatively poorer yields in the future when even cash yields 1% or so.

In the case of bonds, higher yields automatically means lower market prices because you need more of an older bond to get the same yield as a newer one, so you're not willing to pay as much. The NAV of Total Bond Market reflects the market value of all its bonds. The NAV and yield have moved as such:

Date Price SEC Yield
01/02/2013 $11.06 1.59%
05/16/2013 $11.00 1.56% (recent top)
06/25/2013 $10.59 1.83% (today)

The distribution yield may vary up and down depending on the exact history of the bonds in the fund, but it's always the SEC yield that reflects what you can expect to earn in the future.

(Other factors affecting bonds this year were the improving prospects for the economy, which makes stocks and riskier corporate bonds more attractive. But as seen from the "recent top", this has been completely overshadowed by the expected move in rates)

As always, you should stay the course despite adversity in the market. Bonds are still serving an important role in your portfolio, and if anything they are more attractive today than when you bought. This 5% decline (or 6% on your cost basis) in 6 months, minus the 1% or so dividends you have received, may feel dramatic but it's rather small compared to stocks -- which can do this in a single bad day and they can be down 20% or more in a bad 6-month period that's not even a complete debacle like 2008. As I mentioned, the market has factored in the professionals' best guesses of future move, and for us mortals it's hard to argue that we can outsmart them.

Hope this helps!
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Re: Bond fund investing- need advice

Postby ps56k » Wed Jun 26, 2013 3:04 pm

After awhile, you start reacting and slicing and dicing into different thought paths - driving yourself nuts.
I currently have my bond funds equally split between -
VBMFX - total bond
VWESX - long term corp
VWINX - wells income
VIPSX - TIPS

Up until recently, I had thought it was an ok split, having gone into each new fund over the years,
and then equally contributing to each fund.

I looked to bond funds to steady the boat - looking at the charts going back to the 2008 abyss...
wanting the least amount of loss...

Image

SO - now the major choices seem to be:
1- Long vs Interm vs Short - (for corp, TIPS, Treas)
2 - how long will this "transition period " last ?

I have done nothing at this point...
Can't decide if I should add yet another bond fund -
maybe a Short duration fund - and slice off some from each to fund it ?
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